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David Lin

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The fiscal and monetary conditions have never been stronger for gold prices, and while the yellow metal already broke records this week by hitting $2,000 an ounce, Frank Holmes, CEO of U.S. Global Investors, doubled down on his $4,000 an ounce by the end of this bull cycle call.

Price corrections can happen along the way, Holmes said, but gold investors should buy on the dip.

“Every time you have a secular bull market, there are many 10% corrections. So you can easily get a 10% correction in stocks, if you get a 3% correction in bullion,” Holmes told Kitco News. “It’s just recognizing that that ratio of 3-1 is important, and if you have the stomach to weather it.”

On the economy, Holmes expects inflation to rise, but rates to stay low, creating a negative real rate environment.

“The greater the negative real interest rates, the greater the price of gold,” Holmes noted.

Holmes comments come as gold has breached the much anticipated $2,000 an ounce last week. Spot gold last traded at $2029.70 an ounce on Wednesday.

However, money velocity, a measure of the frequency of consumer transactions and is used as a gauge for economic health, has been decreasing, suggesting the people are not spending money.

Holmes argued that money velocity is no longer a valid metric for measuring inflation.

“You just can’t use money velocity now as an indicator of inflation. That’s really an important factor. I think more important is to remember that since 1980 when gold went through $850 and silver $50 and the gold-silver ratio back then was 17-1, you had very high interest rates. It’s very important to put that into context with what we have today,” he said. “The calculations for CPI [the consumer price index] for when gold had hit $850 has changed many times.”

The gold-silver ratio has been dropping as silver has outperformed gold recently, and Holmes said that trend is indicative of more interest from investors in the metals sector.

Author: David Lin

Source: kitco: After $2,000 gold price, $4,000 is next; Frank Holmes doubles down on call

Gold prices have hit all-time highs, but industry heavyweights Jim Rickards, best-selling author, and Peter Schiff, CEO of Euro Pacific Capital, both think that the rally is far from over.

Rickards’ analysis points the gold price to $15,000 by 2025.

“I would put [gold at $15,000 an ounce before 2025,” Rickards told Kitco News. “If you just take the average of the prior bull markets: 1971 to 1980, nine years, 2200%, 1999 to 2011, a twelve-year bull market, about 700%. Just take the average, you don’t have to go to the higher of the two or extrapolate, if you just take the average of the two you would say the next bull market is going to be a little over 10 years and it’s going to go up 1500%,” he said.

$15,000 is the implied, non-inflation price of gold should a gold standard be adopted, theoretically speaking, said Rickards.

Schiff pointed out that historically, the Dow/gold ratio has seen much higher levels than today, suggesting that should the ratio retrace historic levels, the gold price should be much higher.

“Another way to look at it is to just look at the price of gold in relation to the Dow Jones, because you have historical reference points where twice in the prior century at significant bear market lows, the Dow traded down to a single ounce of gold: 1932 the Dow Jones was roughly equal to an ounce of gold, and in 1980, the Dow was roughly equal to an ounce of gold,” Schiff said.

Schiff added that at the current levels of the Dow Jones, the price of gold will have to equal $26,000 an ounce to achieve a 1:1 Dow/gold ratio.

Both Schiff and Rickards agreed that a major retracement in gold prices during the current bull market has already happened, and that another significant pullback in prices is unlikely to happen.

Author: David Lin

Source: Kitco: $15,000 gold price? Jim Rickards and Peter Schiff give forecasts

Historically, corrections in gold prices have made for sound buying opportunities, and this time is no different, said Andrew Hecht, of the Hecht Commodity Report.

In a recent article, Hecht noted that gold’s pullback below $1,700 last week could mark the start of a new bull rally.

Long-term, prices are headed towards $2,000 an ounce, with $3,000 or higher within the realm of possibility, he said.

“Gold many be sleeping for now, but much higher highs are on the horizon if the price action that followed 2008 is an example,” Hecht said.

When buying on dips, Hecht prefers levered exchange traded funds, the ProShares Ultra Gold (UGL) and the Velocity Shares 3X Long Gold ETN (UGLD).

Gold prices traded lower on Monday, with June gold futures down $17.10 an ounce as of the afternoon.

Hecht noted that since gold’s rally up to a high of $1,788.80 an ounce in April following the bottom in mid-March, the yellow metal has not retraced its midpoint of $1620.90 and has maintained a range around the $1,700 level.

At the same time, price momentum looked neutral on either side of the $1,720 an ounce level with the total number of open long and short positions flatlining around the 500,000- contract level since late March.

However, recent economic developments are about to break this price ceiling, he noted.

The record-levels of monetary stimulus, many times in magnitude of what was issued in 2008, present the catalyst for gold’s upcoming meteoric rise, the report said.

“The stimulus was bullish for the gold market in the aftermath of the 2008 financial crisis. Gold is likely to have an even more explosive impact on the yellow metal in 2020 and beyond,” Hecht noted. “The current [stimulus] requirements, at over five times more than in 2008, reflect a far more severe threat to the economy in 2020.”

Furthermore, we are only seeing the tip of the iceberg when it comes to bad economic data releases, Hecht noted.

“There are no precedents for the self-induced coma in the US and global economies. The loss of jobs, contraction in the worldwide economy, and price tag for the global pandemic guarantees that the data over the coming months and years will reflect the most challenging period since the Great Depression of the 1930s,” he said.

Wall Street analysts concur, with J.P. Morgan recently projecting that U.S. GDP could contract by 40% in Q2 and unemployment reaching 20%.

Even once the economy starts to recover, many of the jobs lost today will unlikely return, Hecht said, which would create further tailwinds for gold.

“The economy will require government stimulus programs and record low interest rates for the foreseeable future. Stimulus increases the money supply, which weighs on the value of the fiat currencies that derive value from the full faith and credit of the countries that issue the legal tender,” the report noted.

Author: David Lin

Source: Kitco: Gold, the sleeping giant: $3,000 price level could happen

(Kitco News) – Years of accumulating government debt, monetary and fiscal stimulus, have built a ticking “inflation bomb” that may finally be triggered by the current recession, this according to David Kelly, chief global strategist at J.P. Morgan.

“In the aftermath of the Great Financial Crisis, it seemed we had built ourselves an inflation bomb. A huge increase in government debt, monetized by the Federal Reserve, and triggered by an economic recovery should have caused inflation to surge,” Kelly said in a recent report.

The ramifications of an inflationary environment would be a return to tightening monetary policy by the Federal Reserve, as well as a potential to raise taxes on households in order to service the enormous debt that has been accumulated, the report said.

“For investors today, with long-term bond yields at historic lows, it is a reminder that real assets, including stocks, real estate and precious metals can serve an important, although long-redundant role, in protecting a portfolio against the risk of inflation,” Kelly said.

The ignition to this dormant bomb would be government missteps in the form of excessive monetary and fiscal stimulus, the report said.

“All told, the federal government has now enacted 4 separate pieces of legislation to address the pandemic. The Congressional Budget Office estimates that these will add $2.7 trillion to the federal debt over the next 18 months,” Kelly noted.

He added that while the small business grant program is intended to last only until the end of the summer, the government could approve another $1 trillion in aid should the shutdown continue longer than expected.

Should this happen, federal debt could rise to historic levels, he said.

“This, combined with interest costs and the automatic impact of a deep recession on both revenues and spending, could result in deficits of an astonishing $3.8 trillion this fiscal year and $2.9 trillion next fiscal year, boosting the debt from 79% of GDP at the end of the last fiscal year to 109% of GDP by the end of fiscal 2021, thus eclipsing the all-time record of 108% of GDP set in 1946 as the U.S. added up the extraordinary costs of fighting World War II,” the report said.

Kelly’s comments come as the Federal Reserve announced Wednesday to keep interest rates unchanged at the zero bound range.

The question of when higher inflation, higher taxes, and higher interest rates can reappear would depend largely on the forces that have suppressed inflation and interest rates in the last economic expansion, as well as monetary policy during the next recovery, he said.

Worries about inflation during the last expansion were misplaced because even though money supply increased, it did not grow at the same pace as bank reserves. A lack of bank lending further exacerbated the issue.

However, this time, the macro landscape looks very different from the last recession.

“First, both the Federal Reserve and the Federal Government will likely be in a more expansionary mode. On the Fed side, the fact that this recession wasn’t preceded by a financial bubble will probably result in a more indulgent regulatory stance, encouraging more bank lending,” Kelly noted.

Additionally, the pace of recovery this time could be very different.

“Second, the economy is likely set for a much more rapid rebound after the pandemic than was the case in the aftermath of the financial crisis. Put simply, once a vaccine is widely distributed, pent up demand among the American public for a very wide range of services and goods should be unleashed, and, while supply should be ramped up quickly also, the very pace of growth could prove inflationary.” Kelly said.

Author: David Lin

Source: Kitco: ‘Inflation bomb’ could finally blow up, says J.P. Morgan; what happens next?

(Kitco News) – Gold prices could climb to $5,000 in a few years, this according to John Butler, author of “The Golden Revolution.”

Butler attributed this price growth to the longevity of loose monetary and fiscal policies that will come as a result of COVID-19, as well as gold’s historical performance during periods of declining economic growth.

“Based on the historical pattern of the 1970s, and stagflation, and other times these sorts of things have come about, I think gold is going to rise, by orders of magnitude,” Butler told Bilal Hafeez on the Macro Hive podcast. “I think it is perfectly realistic to see gold closer to $5,000 than where it is today in a few years’ time.”

On the lasting effects that the pandemic will leave on the economy, Butler said that policy reforms are here to stay.

“Politicians jump on whatever opportunity to try and push their pet agenda forward, and in some cases, it might be a very well-meaning program and in other cases it might be a way to try to increase their power and influence. I see all of the above right now,” he said. “The other thing is what Milton Friedman said decades ago, [which is that] there is nothing more permanent than a temporary emergency government program.”

Although gold has already hit historically high valuations, Butler said that simply looking at the price in nominal terms may not give the full picture.

“You have to ask yourself the question ‘is the nominal price of gold really that meaningful?’ I’m not sure it is, because if you look at gold deflated by the CPI, or a stock market index deflated by the CPI, or for that matter a credit index deflated by the CPI, and you start comparing gold to these other traditional stores of value, actually, gold arguably looks cheap,” he said.

Developing a framework for identifying the fair value of gold can be done by looking at other macroeconomic variables that have a definitive correlation with the yellow metal, Butler noted.

“The ones that have the most explanatory power over both the median and long term are real interest rates and long-dated oil prices, and I stress long-dated, that is, way out the curve. The reason for that is that intuitively, the real interest rate is the natural opportunity cost trade-off vis-à-vis holding gold,” he said. “The oil relationship, however, is really a proxy for what is a general energy relationship, because energy is the only really universal input. Even human labor requires energy to be performed in an economic value-added way.”

The long-term price of energy then becomes the opportunity cost for mining gold out of the ground, he said.

Butler made the case that gold’s ability to store wealth, especially during bear markets, makes it an invaluable resource.

He pointed to the 1970s and early 1980s when both stocks and bonds performed poorly.

“There was a long period there when gold was outperforming both, and outperforming on historically very, very large margin,” he said.

From 1970 to 1979, gold prices rose more than 1,300%, climbing from $35 to $512. During the same period, the S&P 500 dropped more than 50%.

During economic shocks, such as the oil crisis of the 1970s, investors should not be exposed to assets correlated with economic output, Butler said, and instead be exposed to economic input, or raw commodities.

He noted that taking into account gold’s historical performance, a balanced portfolio should include 10% to 20% of gold, which is much higher than most investors hold.

Additionally, gold’s supply, compared to other sources of money like liquid assets, make it look relatively cheap in value.

Author: David Lin

Source: Kitco: Gold is cheap; prices to hit $5,000 in medium-term, says economist

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